Fraud

By Guest Blogger Doug Rowat

Former Enron executive Jeff Skilling will be released from prison shortly. You might recall that Skilling, CEO Kenneth Lay and CFO Andrew Fastow were the poster children for corporate greed and fraud back in the early 2000s. Lay died of a heart attack in 2006 and Fastow served six years in prison for his misdeeds and now conducts (what else?) cautionary-tale speaking tours. Skilling, however, fared the worst (if you believe that Lay might actually be better off six feet under) receiving a prison sentence of 24 years for a long list of convictions including securities fraud.

However, in 2013, the court reduced his sentence, which means he’ll shortly be landing in a halfway house (technically, for the PC crowd, a “residential reentry management facility”) before being released completely, likely by early 2019.

And thinking of Skilling finally being a free man unexpectedly got me thinking about ETFs. Why? Because management fraud and misconduct, or even just incompetence, doesn’t matter to ETF investors. Over-concentrated investors (or employees) who owned Enron, at its peak the fifth most valuable corporation in America, saw their investments devastated. It was made worse, of course, by the fact that Skilling was at the same time living it up in his Houston mansion below. Broad-market ETF investors, meanwhile, felt barely a portfolio murmur and quickly moved on with their lives.

Jeff Skilling’s former Houston estate

Source: Curbed

And fraudulent or incompetent management teams within large corporations have not simply disappeared post-Enron. Similar problems continue to occur within the “blue-chip” US equity space. General Electric, for example, somehow managed to plunge 45% last year while the DJIA advanced 25%. An incredible accomplishment for a diversified, industrial conglomerate operating in the midst of a rapidly expanding global economy. And it now appears that, yes, outright fraud could be an issue for GE with both the SEC and the US Department of Justice recently announcing that they were widening their probes of its accounting practices. GE stock, by the way, is now down 69% from its 2016 highs and the company has been booted from the DJIA.

While the S&P 500 has been slightly positive this year on a total-return basis, there are—incredibly—44 stocks that are down by 25% or more (see table below for the 10 worst performers, which are all down by roughly 40% or more). And it’s this wild divergence in performance across an index that makes individual stock picking so dangerous. If you’d selected just one or two of these losers in a concentrated portfolio then you’ve almost certainly had a very painful 2018. It’s also a safe bet that the decline of some of these weak performers is not simply a result of normal market forces or business cycles. Executive incompetence or bad behaviour (hello Steve Wynn) are likely factors as well. And who can possibly keep track of management quality or the inner boardroom workings for all the individual companies that you might own? You’ll be caught off guard constantly. Just ask Enron investors.

S&P 500 y-t-d worst performers

Source: Bloomberg, Turner Investments

Stick with broad-based, low-cost, fully diversified ETFs. If the CEO of a particular company fleeces investors and heads off to the Cayman Islands with wads of cash Saran-wrapped to his secretary à la The Wolf of Wall Street, you’ll still sleep well at night.
————————
And finally, recall that in my last blog post I warned that the mainstream media misleads investors by focusing on the most terrifying outcomes to gain viewers and readers. Fear sells, even if the forecasts are not at all probable. Well, right on cue, throughout the October downturn, pulse-pounding headlines and frightening images dominated the financial news. Below are a few examples. Nothing subtle, of course, just a wildly screaming Janet Leigh from Psycho and a shovel literally burying your money in a grave:

Fear!

Source: MarketWatch

Fortunately, there were no images of horrific car crashes. Wait, my apologies…

Wait, more fear!

Source: Bloomberg

But here’s a better image—the steady, up-trending channel of the S&P 500. Viewed from a longer-term perspective, the current market pullback barely registers:

S&P 500: steady as she goes

Source: Bloomberg. Turner Investments

So, keep perspective. Ignore the headlines. There’s a high probability that things will turn out better for markets than they did for Janet Leigh.

99 comments ↓

Since I’m definitely not the smartest guy in the room, I will just put up a couple of recent howmuch articles…

M44BC

“These are the Biggest Corporate Giants Over the Last Decade.

Disruption is the new buzzword in business as both big and small companies are worried about scrappy startups with better technology entering their marketplaces. Our new visualization highlights the top three U.S. companies, measured in terms of overall revenue, in the last decade. Disruption occurs at the highest levels of corporate America, but our visualization highlights just how much money is at stake.

We gathered our numbers from the annual Fortune 500 list, which Fortune refreshes every year. Numbers for each year reflect the previous year ending December 31. Before diving into an analysis of our visualization, let’s call out two underlying assumptions. First, we have not adjusted these figures for inflation. As years go by, inflation causes the value of a dollar to slowly weaken. We took this approach to preserve the rankings at the time each company posted its revenue figures, not in comparison to revenues today. Second, revenue gives you a great idea about the size of a business, but very little about profitability. A company can post record-breaking revenue numbers and still lose money, like what’s happening at Tesla right now.

All that being said, our graph raises several key insights both about the particular situations of these companies and the broader U.S. economy. Walmart has remained in the top spot nearly every single year over the past decade except two years. Today, Walmart’s revenue is more than twice as high as second-place Exxon Mobil, a gap that has consistently grown year after year. It would appear that nobody will be able to challenge the country’s largest employer for quite some time.

Another interesting trend is how oil companies like Chevron and Exxon Mobil continue to post outstanding revenue numbers, even as the price of oil has fluctuated. Our visualization suggests that these companies have developed business models that are mostly immune to market pressures. They can make tons of money and pay their investors consistent dividends, no matter what the economy is doing. They fell off the top three in 2016, but don’t count Exxon out in the years ahead.

Our visualization also reveals a shift in corporate America, namely Apple’s ascendance as one of the most valuable companies ever. Beginning in 2016 especially, the multinational tech company from Cupertino, CA started shattering revenue forecasts thanks in large part to thecontinued success of the iPhone. People are willing to shell out over a thousand dollars for a new phone, making Apple a luxury brand that delivers both a status symbol and a sleek user experience.

Berkshire Hathaway also made it into the top three companies, but through a very different route. Instead of continuously surpassing expectations in product development, CEO Warren Buffett simply invested in companies with solid business models, like Pilot Flying J (gas stations), Duracell (batteries), Heinz (condiments), and Prudential (insurance). Buffett also has his eyes set on disrupting the healthcare industry, which would only further increase these figures.

Nothing is permanent but change, especially in the business world where so much money is at stake. These companies generate hundreds of billions in revenue year after year, but the top three rankings now include companies that weren’t anywhere near the top in 2008. Walmart is clearly paying attention to these trends as executives explore new business models, including in ag science, drones, and logistics. Time will tell if these efforts pay off for the retail behemoth.”

Jeff Bezos, the founder of Amazon, once said, “Your brand is what other people say about you when you aren’t in the room.” We might add that if almost everybody is saying great things about you, then you have an extremely valuable brand. This is one way to think about the results our newest visualization.

We found the data for our visualization at Forbes, which publishes an annual list of companies with the best brands. Researches considered only companies with a presence in the U.S. market (which excludes a lot of valuable companies overseas). Forbes then attributed a percentage of each company’s 3-year earnings to its brand—a higher portion for luxury goods, and a lower portion for everyone else. We used these numbers to create a cluster chart, where the size of each bubble corresponds to the value of the brand, and the color represents the industry.

Top Ten Companies with the Most Valuable Brands ($B)
1. Apple (Technology): $182.8B

2. Google (Technology): $132.1B

3. Microsoft (Technology): $104.9B

4. Facebook (Technology): $94.8B

5. Amazon (Technology): $70.9B

6. Coca-Cola (Beverages): $57.3B

7. Samsung (Technology): $47.6B

8. Disney (Leisure): $47.5B

9. Toyota (Automotive): $44.7B

10. AT&T (Telecom): $41.9B

Our visualization highlights how the tech sector dominates consumer perceptions of brand value, representing an incredible $872.6B in combined value. Each of the top 5 companies come from the technology sector, including 6 of the top 10. This isn’t a surprise if you’ve been paying attention to the stock market recently, where the so-called FAANG stocks have generated outsized returns for several years running (Facebook, Amazon, Apple, Netflix and Google). If anything, the one surprise at the top of the list is that Netflix is missing; it’s way down at 55th on our list. “Netflix and chill” just doesn’t have the same appeal as iPhones.

Our visualization also makes it easy to see which sectors have the best brands. After technology, the automotive sector has the second highest collective brand value, led by companies like Toyota ($44.7B), Mercedes-Benz ($34.4B) and BMW ($31.4B). Volkswagen just barely makes it onto the list with a brand value of $7.9B, no doubt still recovering from its vehicle emissions scandal. The financial services and consumer packaged goods sectors both also stand out as industries with above-average brand valuations. Coca-Cola ($57.3B) deserves special mention as the only beverage company to crack the top 10.

To put it simply, the value of a brand is how customers perceive it. This means that brands can be fickle. Take Apple as an example, the most valuable brand in our visualization and perhaps of all time. Is the Galaxy S9 really all that different from the iPhone X? A string of corporate scandals or products that fail to deliver a premium experience suggest that Apple’s time atop the brand pyramid might be coming to an end. Then again, the company sold well over 50 million $1,000+ iPhone Xs, setting another record in revenue for the company. Good luck trying to compete with that type of premium brand loyalty.

In some cases the goal of a portfolio might be all about generating a quantity of cash each month or year that never goes down and ideally goes up with inflation or more. The market value of the portfolio in some cases would be truly unimportant. This could be the case for a portfolio that is designed to disburse annually a given amount of cash to charity or as a trust fund or perhaps as a retirement income where there was no plan to spend the principal, essentially ever.

A well diversified basket of high quality dividend paying stocks might do the trick. There are well-diversified dividend ETFs available.

If such a well diversified dividend portfolio existed over the last 40 years (pre-dating ETFs) I am not sure that there would have EVER been a year where the cash dividend did not rise.

And this would be all the more true if it contained 40% actual fixed income. (Bonds and perpetual preferred shares).

Yet, this portfolio would have had major market value losses from time to time. The advisor / manager would have come under fire. The broker statements would have placed the periodic market value losses “In your face”.

Yet the portfolio in this case would have been 100% on track to meet its objectives (send out growing but never declining cash) and on track to last forever despite spending 100% of the dividends each year! And not only that but the capital value would grown substantially over the decades even as the capital market value was volatile.

It seems to me that almost the entire investment industry is focused on those changes in market value. New rules require monthly and annual total returns to be put “in-your-face” on broker statements. But much less attention is paid to the progress of cash income?

I believe some investors are following such a cash generation goal and trying to ignore the market value fluctuations.

Somehow I suspect the new guys/guest bloggers visit the SBUX at their building’s second floor podium.
When you have those fancy chart reading certificates you must play it safe. In an elevator with a guy in the requisite medium blue suit…holding an indy coffee chain cup? Well I never. Might be a loose cannon that guy.
SBUX sells virtueness err virtuosity. Wealthly enough to afford it but not wily enough to steal the boss’s customer list. Enough conformity.

Earnings across Canada are almost all back to their peaks according to my earnings chart. Alberta earnings are now within less than 1% of their Oct 2014 peak. That seems to be an argument for continuing Canadian central bank rate hikes.

Yes lots of doom and gloom out there, can you answer a question raised on this blog, and I have been reading allot of lately. World debt.
Mr. turner has quoted many times Canadians gorged themselves on debt. US government debt is now 106 percent of GDP.
All we need is for consumers to stop spending and then the music stops.
Liberals are in a spending binge along with most provinces.
You’ve been predicting a housing melt down, and baby boomers with no savings.
How can the stock market continue to rise against the debt ballon, housing slump, baby boomers no savings and broke governments.

In socialist, T2 run Canada, your principle concern is not going to be crooked CEOs, it is going to be taxation.

There are legions of people in this frozen white country who sincerely believe that their problems are the fault of those who did better in life than them, and that the solution to those problems lies in wealth taxation.

The Pabst Blue Ribbon drinking hordes are convinced that your money belongs to them, and they currently have a sympathetic ear in Federal politics.

This may all come to a crashing halt as of November 2019 a la Andrew Scheer (saviour of those who worked hard all their lives, saved, eschewed luxuries and as a result, have some money stashed away). It looks highly likely that T2 and his fake feminist trust fund kid hangers on, will be flushed down the toilet of fiscal reality in November.

If not, then I would suggest going off shore with your money.

Canada, Liberal governed, is heading towards wealth taxation. This means that people who spent their lives not doing all that much, ended up nowhere and are peeved about it, can lay claim to the saved up nest eggs of those who put the effort in and got somewhere. Because, you know, we all need to be equal.

Like, they tried that in Cuba.

And it worked great. If you don’t mind converting your 1950s car to run on wood and brush (cause there’s no gasoline) and getting excited about your monthly state subsidised rice and grain rations.

I note, with approval, the use of the log scale on the S&P 500 index chart. That’s the ONLY way to properly show the trend in a stock index over time.

Serious Question: why? Inflation adjusting? How is the increase in log function decided?

***************************************
Not just inflation but that is part of it. A diversified stock index has a rising trend over long periods of time. This is fundamentally driven by earnings growth (which includes real growth plus inflation). Earnings grow in part because corporations typically retain more than half of their earnings and reinvest that for growth. The S&P 500 companies on average grow their earnings almost every year. In any given year the index may not rise but over time it does in response to earnings growth. There are also temporary factors like changes in interest rates. But it is earnings growth that drives the index to rise over the longer term.

Anyhow, this all means that the index grows at some average rate over long periods of time, be it 3% or 7% or whatever.

Something growing even at an average 1% per year and certainly at an average 7% is undergoing “exponential growth”.

If graphed on a regular arithmetic scale over decades the graph will “hockey stick”. It would look like growth is very high in recent years and very low in the early years.

On a log chart, a constant 4% (or whatever) growth plots as a straight line. ONLY on a log chart can we see whether the stock index growth has remained fairly steady over the decades or has it slowed down or speeded up versus its early years. Also only the log chart properly shows changes in volatility over the years.

The longer the time period, and the higher the growth, the more crucial it becomes to use a log chart.

The increase in the log function is set by math, if one inch of height on a log scale in the early years is say 50% growth, then so is 1 inch of height in the later years.

so if all you need is the spy which is the s and p 500, with an mer of .09% liquid as hell, why would anyone need
to worry or pay anyone like 1% or mer of 2.5% a year to basically do the same thing.
like many professions, investment management is almost irrelevent. and you got to be really good to justify the fee difference, and most canadian based advisors firstly are not that good. and second the most important canadian stocks suck, like really suck, like 2 to 5 out of a 100 are good, most canadian stocks are crap.
why pay any fee to anyone

Enron was a horror show, not least in that the company policy kept regular employee ‘investors’ from being able to sell their stocks even as the top echelon were cashing out. As I recall the company pension plan died along with the company. Employees lost all pension contributions & I am not sure if there were even reduced pension benefits available in the aftermath to any Enron retirees.

White collar crime often nets lesser sentences because it is considered less serious than a direct physical assault. Yet the impact of losing one’s income/pension/benefits etc. could have a long term detrimental effect on one’s health or the health of family members in addition to the financial hardship that accompanies such an event.

#4 Smoking Man on 11.03.18 at 2:15 pm
“That’s not the only thing they lie about, like downplaying the giant red wave about hit the world hard!!!!!”
=====================================
Every talking head on BNN out of all places, Is convinced that the Democrats are going to take the House.
They will be in for a rude awakening come Tuesday evening of November 06th…

The crew at FinancialSense.com have been ranting for at least half-a-year about passive ETF investing; when the top 5 ETFs start selling, who are they going to sell to?

“Ownership of stocks in the S&P 500 is concentrated with three companies: Vanguard, BlackRock, and State Street. They represent about 88 percent of the S&P 500, and if we include Schwab and Fidelity, over 90 percent of the S&P 500 is basically now in the hands of five companies.”

(…)

“This may leave us facing nasty results, because in the event of a market downturn, as these ETFs and passive index funds crowd to exit their positions, they create a market liquidity trap as there is no one left to sell to.”

An very unlikely scenario, but with 30 ETF providers in Canada now and counting, it’s not inconceivable. Stick with the majors and be diversified here also. Our model portfolios currently utilize 7-8 different ETF providers. Additionally, CIPF, which any reputable investment management company offers, provides sufficient protection for most investors.

“so if all you need is the spy which is the s and p 500, with an mer of .09% liquid as hell, why would anyone need
to worry or pay anyone like 1% or mer of 2.5% a year to basically do the same thing.” — crossbordershopper

Hmmmm …. good question. I would venture the benefits of advisers would be hand-holding during bad periods, tax avoidance strategies, and perhaps re-balancing.

While I dont disagree with ETFs being an amazingly low cost diversification option, I am beginning to fear what happens when too many investors are in these things. Can one of the posts go into the downside potential (on the broader market) of these products?

It’s sad they don’t imprison today’s central bankers who have rigged the U.S. stock market into an other realm some 50 to 100 years in the future. The Fed is still there shorting the VIX. No one does time anymore for far worst crimes than back in the Enron era. Ultimately the U.S. corporations who bought back their own shares at the most overvalued valuations in history will be the biggest losers.

As the news of decreased sales and increased listings was buried in the Sat Victoria Times Colonists newspaper. Should be on the front page to inform the public but I guess that would piss off the real estate industry.
The financial post has alluded to further troubles in financial markets. At the moment they really need the revenue.

Thanks Flop. Yes, it’s me.Truth be told, I did get your e- mail yesterday. Thanks, and I appreciate and agree with your message. I recently returned home from a year of recovery/therapy in the hospital.

Freedom First

//////////////////

Well I’m rooting for this to be true and so I need you to do either of two things to confirm its you since this post is titled Fraud.

Just reply to the email I sent you.

Secondly you can respond on here how many letters/numbers there are before your @ symbol on your email address and I will confirm your authenticity.

Even though there are stocks down much more than the index, there are stocks up much more than the index and if you buy well managed blue chip companies you’ll do fine. I own about 25 stocks and my 5 year return is 11 percent, which is higher than the index.

With the log scale, a half inch wiggle near 2018 is the same in percentage terms as a half inch wiggle in 2009.

But the index points involved with the 2018 wiggle would be greater. Is it not more fair to compare volatility across time in percent of index value as opposed to points?

I believe you would find that in this chart the percentage distance from the lower channel limit to the top channel limit is always the same while the number of points of index value increases as you go towards 2018.

Thanks Flop. Yes, it’s me.Truth be told, I did get your e- mail yesterday. Thanks, and I appreciate and agree with your message. I recently returned home from a year of recovery/therapy in the hospital.

Freedom First

//////////////////

Well I’m rooting for this to be true and so I need you to do either of two things to confirm its you since this post is titled Fraud.

Just reply to the email I sent you.

Secondly you can respond on here how many letters/numbers there are before your @ symbol on your email address and I will confirm your authenticity.

I hope it’s you or else it’s a pretty sick charade.

Let’s get to the bottom of this today…

M44BC
..
Sherlock Flop hot on the trail of a potential freedom first fraudster….

#25 crossbordershopper on 11.03.18 at 5:03 pm
so if all you need is the spy which is the s and p 500, with an mer of .09% liquid as hell, why would anyone need
to worry or pay anyone like 1% or mer of 2.5% a year to basically do the same thing.
like many professions, investment management is almost irrelevent. and you got to be really good to justify the fee difference, and most canadian based advisors firstly are not that good.

—

What we offer clients is not primarily performance based. We provide risk management, long-term financial planning, tax strategies and, importantly, guidance when markets are tough. Your portfolio can generate loads of ‘alpha’, but if you can’t convince clients to remain invested in the face of volatile markets (which always pass) then your great performance is irrelevant.

We now have the ability to walk to three very good craft breweries, who sell us fermentations way better than anything that the big three, who used to control the Ontario beer market, could ever produce. The prices are not that far off. I mean, almost $50.00 for a 24 pack of preservative filled, pasteurized corn beer is not that far off the $17.00 we pay for six tall cans of 7.1% triple hopped grain beer at our local craft brewery.

I make beer in the shed behind my house, so I know what goes into it. The main thing is starch. Grind your chosen grain(s), to release the starch, and then heat to 66.67 degrees for an hour or so. The enzymes do the rest. You can accomplish the same result, for a fraction of the price, using corn starch, but the result is the slop that the big three like to pour for $18.00 a glass at the Air Canada Centre, and not something that i can stomach.

The rest is just physics. Boil your wort for an hour, hop as you please, and cool and ferment. Filtering is not necessary and not recommended. You can bottle condition it to get the necessary amount of “bubbles” (ie, CO2).

70 bottles of high quality grain beer cost me about $25.00 to make.

So, getting back to cheese.

Back when the Ontario government would not permit Ontario companies to make beer, you could only get the slop that the big three sold. They changed that. There was a lot of screaming and crying from the big three. They would go bankrupt. There would be moral deterioration of society. We would all die from the evils of drinking. Neighbourhoods would be destroyed. The evils of beer would run rampant.

Actually, the opposite happened. People now drink beer because it tastes good, not so they can get drunk. The slop the big three brewed was only good for one thing, and people drank it just for that. Our neighbourhood craft breweries have not become unruly booze can establishments. The exact opposite has happened. We have a thriving local economy of craft breweries, serving very interesting and tasty beers, that can be enjoyed on a variety of patios and venues throughout our province.

We have not become a moral cesspool. Society did not collapse.

The Dairy board. We cannot make “craft cheese”. You need a license and a licensed dairy producer to purchase from. A person cannot open a “craft cheese shop” and start producing their own cheese on Bloor West Village. They would be arrested and their operation shut down.

Why? Because society will collapse otherwise. People will die. It will be the end of morals and values. Civilisation as we know it will cease to exist, and be replaced with anarchy and chaos. It will be the end of days. The last breaths of God and Country. It cannot ever happen.

The large companies who own all the Dairy quotas, would have trouble paying their bills, and politicians would not get such generous donations at election time. We could not continue as a nation.

Go to Italy and go walk down the street in one of their many cheese producing towns. Stop in and enjoy the wares. This is what Ontario would be like, without the Dairy Board.

Toronto has its many, many interesting craft breweries.

Imagine a Toronto with an equal amount of craft cheese stores, each producing its own varieties of cheeses. Entire cheese districts, all with their unique brands of cheeses, for sale at reasonable prices, to the general public.

Of course, this can never happen. We need to be sold overpriced “Canadian Cheddar”, at $14.00 a slab for this disgusting pseudo cheese, and we have to all be proud as Canadians, living in this “best country in the world” where people cannot produce and sell cheese, because it would be the end of the world if that ever happened.

Chew on your cheddar, folks.

And fight the Dairy Board.

One day, we’ll win. And cheese will be like craft beer. Readily available, in many different flavours and colours, produced by local artisians and adding value to the local economy, rather than controlled by a small amount of quota holders with good political connections.

Pot: Good luck to all those who bought the stock. You will need it. Niche brand. Go to Amsterdam. Very few people actually smoke the stuff, or want to. This is not a mainstream product. Just ’cause T2 is a pothead, doesn’t mean the entire world likes the stuff.

“#19 Brian Ripley on 11.03.18 at 4:30 pm
Earnings across Canada are almost all back to their peaks according to my earnings chart. Alberta earnings are now within less than 1% of their Oct 2014 peak. That seems to be an argument for continuing Canadian central bank rate hikes.”

I disagree with the logic. Only being back to 2014 levels, earnings, implies that BoC policy should be able to allow earnings to grow into levels that reflect inflation, ie: approximately 8% since 2014. Hence, raising the BoC policy rate at this point merely in recognition of earnings having reached the 2014 peak would be an inappropriate usurpation of value from TSX stock owners in favour of fixed income and the bond market. The BoC is already chronically unable to meet its 2% mandate and September saw CPI actually in deflation.

I agree with your comments that current commodity weakness and deflationary trends are very worrysome, in addition to the happenings in the housing market now starting to come off the post-2013 plateau. Rate cuts may very well be indicated. Given how close the CAD$ GoC yield curve is to inversion, if not even partially already inverted at the long end, evidence is fairly ample.

I’ve written quite a few times that the theme over the next decade or two will likely be that of divergence with the United States economically and monetary policy wise. Deflation in Canada, inflation in the USA. A reflection of long-term trade balances, and Canada’s markedely relatively superior fiscal position, the recent Harper/Trudeau mess notwithstanding. US protectionism will drive deflation in the cost of goods imported to Canada, especially goods that formerly would have been destined to the United States.

TSX ends the year positive ?

Yeah I could see it putting on 5-10% in a month or two, but it will still end up being a weak year. But given that its lagged over the past decade, mean reversion should be solidly at the back of the TSX. Next year could be fun though, especially if the precious metals sector really starts contributing.

While I dont disagree with ETFs being an amazingly low cost diversification option, I am beginning to fear what happens when too many investors are in these things. Can one of the posts go into the downside potential (on the broader market) of these products?

The Shlong Zumanga monologue in my fiction novel covers this topic too. But a hell of a lot more fun way.

Thinking of offering it up for free for a limited time for blog dogs.
I’m sure Garth will allow the link as long as it’s free.

The dilemma of doing this, the blog dogs that bought it my revolt, hunt me down step on my face and demand a refund. Buyers of Deplorable. If just one of you say don’t do this, it’s not fair to us. I won’t.

But if no one objects I’ll do it. We need to stop global communism and expose the plan to end capitalism and confiscation of everything we’ve built.

The book is fiction, but as you see events unfold before your eyes that the book predicts. Well I might finaly get the respect I deserve but don’t want.

“While I dont disagree with ETFs being an amazingly low cost diversification option, I am beginning to fear what happens when too many investors are in these things.”

If indexing (including ETFs, more traditional mutual fund structures, pension funds, etc.) becomes too much of the market, the logical outcome is that there will be a lot of investments that are not in the ETFs that will be underpriced. Thus active managers would start to be able to seriously outperform simply by picking investments which are worthy, but have not been included in the indices for whatever reasons.

Its also possible that the active management community cuts its costs severely enough to actually be competitive with the indices. There does appear to be some evidence that active managers can outperform gross of fees, but that its solely their fee structure that makes them uncompetitive. I personally participate in a pension plan whose returns have nicely and fairly consistently beaten the index-based benchmarks against which their performance is measured. Without any indication whatsoever that they’re taking additional risk to achieve such index-beating returns. At any given time, there’s lots of “no-brainer” trades — the Efficient Market Hypothesis that underlies the theory of index outperformance is basically a pile of junk if one has good discipline to do research and proper diversification.

The other potential problem with ETFs can be that some contain rather opaque underlying assets. I personally advise to avoid ETFs that use swaps, derivatives, or forwards as part of their overall strategy. This means none of those currency hedged ETFs or the so-called tax advantaged ETFs that one or more of the Canadian ETF sponsors are marketing.

Thanks Flop. Yes, it’s me.Truth be told, I did get your e- mail yesterday. Thanks, and I appreciate and agree with your message. I recently returned home from a year of recovery/therapy

#49 Freedom First on 11.03.18 at 10:31 pm
#40 Flop

I don’t blame you for being thorough Flop.- 13

//////////////////

Hey Freedom,the number you supplied checks out and I don’t know what you’ve been through in the last year but I’m sure glad you’re still breathing.

People know I have some guilt I live with everyday on this blog.

I was so self absorbed after my surgery that I didn’t reach out to Boom when perhaps I should have.

I was very fragile at the time and perhaps selfishly knew that I wouldn’t be able to handle any negative news regarding his situation.

It wouldn’t have changed much as he passed just two days after his last post but after numerous people asked what had happened to you I tried to learn from my past mistakes and asked Garth to see if you were alright on their behalf.

I respect people’s need for privacy on this blog and I like mine,but every now and then as the years roll by situations are gonna pop up and the old rules go out the window.

We all have our struggles and differences and this blog has always had some good banter happening, but a few people seem to need reminding that it’s no one’s fault on here if they’re having a bad day.

This blog, I believe,has made me better,more engaged citizen, and since you were last on the blog I voted in two levels of Canadian elections for the first time and I even lost my mind and started my own blog as payment for Garth’s efforts by bumping him up to the second most pathetic blog in Canada.

The things I do for friends.

Still can’t write for crap but why just embarrass yourself for the greater good once a day when you can do it twice.

In your own time tell us what you’re up to and your take on things happening nowadays.

Since you have my details now if you ever need someone to have a yak to feel free to email me.

(Or can the mortgage be called early if the lender goes out of business?)

If you get into the nitty gritty of Canadian mortgages, even fixed rate ones, they are mostly callable. In a nutshell, mortgage loan contracts require pristine and full maintenance of a property as a condition of the mortgage loan. Many include clauses allowing for the lender to deem “loss of value” as a trigger for a technical default. Basically put, a bank that is in distress and wants to call its book of mortgages, even fixed rate mortgages, has pretty wide latitude under the wording of contracts that Canadian mortgage borrowers willingly sign, to call the mortgages.

Now obviously a bank that wishes to remain in the mortgage business would not just willy-nilly start calling mortgages because someone didn’t maintain their property in a pristine condition, or the property itself might have lost a bit of value. However, in a situation where a failing institution or its acquisitor is desperate for liquidity, especially during an environment in which realized funds could be re-invested at higher interest rates, I’d expect more of these clauses to be executed.

Its for this reason that the reverse mortgages offered by firms that advertise heavily on TV are complete scams. There is no way on Earth that those firms would sit back and take losses if the mortgage backed loans they wrote went into negative equity and were ultimately only resolvable at a loss. They have a fudiciary responsibility to their shareholders, not to the wrinklies to which they lend. Most elderly people, in my personal experience, do not fully maintain their homes, and clients who are forced to resort to the use of reverse mortgages are most likely basically poster childs for a lack of ongoing maintenance (after all, why are they taking a reverse mortgage in the first place!). Thus, while they think they’re protected by the claims made by the reverse mortgage purveyors, “you can stay in your home as long as you want”, they’re really not. Garth often writes that those who take on the reverse mortgages must really hate their kids, and I tend to agree fully.

There are so many amazing tools and ways to actively managed your own money that not using them going to cost passive investors a fortune. Not selling so-called covered calls against long portfolio is already costing you few hundreds basis points, and somehow it’s not a thing advertised by your money managers, right Doug? :)

And there is not much diversification out there, the most liquid and tradable market is US, the rest of the world is just crap not even worth looking. Just try to buy shares of Japan companies or bonds of Russian gov. Of course there are etf but it’s a proxy and they either expensive or not liquid.

And in the US I’ve read all exchanges collocated within mile distance of each other in NJ data centers.

As an investor, you kinda have to take advantage of all the tech, liquidity and income enhancing strategies (like covered calls)

PS GE is not going out of business any time soon :)
PPS the trend is not your friend, a strategy of trading liquid products is

It seems almost unpatriotic to use Enron in your story. Canadian ETF investors got BRE-X (which was added to the TSX 300 despite having no production profile and no earnings history), Nortel (a third of the index at its peak) and Valeant, #1 in the index and bigger than Royal Bank at its peak.

Disposition (Sales) Process
Any property within the provincial portfolio that is no longer required for the delivery of government programs and services, is circulated to provincial ministries and agencies to determine if there is a continued government need for the property.

#66 crowdedelevatorfartz on 11.04.18 at 8:28 am
Careful Smokey.
The SEC in your beloved US of A just nailed Elon for $20 million in fines for making “stock price changing” comments on the fly…..
—————————————————————
Really only applies to someone with actual influence…

You can’t be charged for yelling fire in a crowded theatre when you are clearly shouting at clouds in an empty field…

There’s a high probability that things will turn out better for markets than they did for Janet Leigh. — Doug

I’m sure you meant to say Marion Crane, the character from the movie, but filming her character’s shower/murder scene did leave Janet Leigh with emotional scars: she took baths for the rest of her life, whenever possible. :)

I’m not so sure. If this new unrestricted social media platform attracts the type of crowd that you see on other “alternative” content sources than it will have very very limited appeal to the public.

Just have a glance at the despicable comments of the zero guy’s website, or, of even basic youtube videos to see what “unrestricted” looks like.

Everything is politicized. 90% of comments are attacks or arguments, basically hatred spewed by the keyboard warriors looking to blame everyone for their problems and paranoia.

My nephew is 3. He watches Youtube cartoons for fun. One day we saw some hateful comments about “globalists” in the comments section. He’s obviously too young to read, but an 8 or 9 year old might see it.

Despicable.

Remember, 95% of people are in the political middle, with no radical views. Not everything has to be politicized all the time. The vast majority of people use social media for entertainment, not to forward a political view.

Ya know Doug, I really enjoy the weekend posts that you and Ryan do. Nothing against Garth, he’s performing a real service here, but sometimes the shtick overshadows the content. Your stuff is a nice tight read.

I personally don’t like and use many ETF’s, but rather tend to use blue chip conservative common shares of corporations that have very long histories of increasing their dividends annually. Mix of Canadian and US. Spread this over 20+ companies through various sectors. I’ve done this for over ten years and it’s worked so far. Have a spreadsheet that shows between 6-8% annual dividend growth. But every year the distributions have grown, and this means more to me than the stock portfolio value on any particular day. Drawback is that the beta value of the portfolio is a bit low, due to the conservative nature of the portfolio, which makes it more defensive rather than growth.

I can’t find a dividend growth ETF that has stable and growing annual distributions. One quarter the distribution is 0.1876, and the next quarter it’s 0.1154, etc.

There are risks in any approach, and I think it’s sll about how comfortable you are.

Italy is not a good comparison. Most prices in Canada (housing, cheese, phone plans, property taxes, etc) make little sense compared to Italy.

Yes you can go to any weekly market in any town in Italy and buy great cheese from local micro-farmers. But just try bringing in cheese to Canada from Italy. I believe the official limit is 20 kg, with anything worth over $20 is subject to highly extortionate duties. The informal line from customs is that you can bring up to 3 pieces of cheese without duties. I had family fly in from Italy recently that weren’t aware of the limits, they paid $100s for cheese they were carrying in their luggage. This after customs held all the passengers from the flight at Pearson for several hours into the night ruffling through everyone’s luggage as if the they were all on a drug kingpin’s payroll.

There’s a high probability that things will turn out better for markets than they did for Janet Leigh. — Doug

I’m sure you meant to say Marion Crane, the character from the movie, but filming her character’s shower/murder scene did leave Janet Leigh with emotional scars: she took baths for the rest of her life, whenever possible. :)

—

Correct, but I thought that might be a bit obscure. Researching this blog post actually inspired me to download the documentary 78/52.

I agree with your comments that current commodity weakness and deflationary trends are very worrysome, in addition to the happenings in the housing market now starting to come off the post-2013 plateau. Rate cuts may very well be indicated. Given how close the CAD$ GoC yield curve is to inversion, if not even partially already inverted at the long end, evidence is fairly ample.

Imagine we have a decent lump sum to invest for a charity or say a young disabled adult to provide a reliable and growing income each year. The market value volatility of the portfolio of no real importance.

Imagine it is a taxable portfolio.

What shall we put in the portfolio? What will the initial cash yield be?

JSS, I looked at XFN, XRE and XUT and I don’t think on an annual basis the dividend has ever declined. Quarterly, yes. Monthly, absolutely.

Do any advisers or publications track income spending portfolios this way showing the annual gain in cash spit off as opposed to annual total return?

Let’s say we wanted the income to be higher. Could we set a rule to sell 1 or 2% of the shares or market value each year and would the cash dividends still grow despite the selling?

Interesting bit of trivia.
An assisstant director actually filmed the “shower scene” as Hitchcock had prior commitments.
They filmed the scene and used the “fake blood” provided by the props dept.
However when they reviewed the film the next day they realized the “blood” in the bottom of the tub washed away too quickly for dramatic effect and you could barely see it..
Realizing the film was in black and white and color didnt matter someone suggested drops of chocolate syrup.
So they refilmed the “drops hitting the tub” with syrup and showed the clip to Hitchcock a few days later. He approved and it was put in the film….”

A former Swiss banker has been sentenced to 10 years in prison for his role in a plot to launder $1.2 billion (CHF1.2 billion) from Venezuela’s state-owned oil company. The case also implicates President Nicolas Maduro’s stepsons.

The former Julius Baer banker, Matthias Krull, was sentenced on Monday in federal court in Miami, where he pleaded guilty on August 22. He admitted joining a network of money launderers that used real estate and false-investment schemes to hide funds taken from Petroleos de Venezuela S.A.

“#68 Fred Allen Sr. on 11.04.18 at 9:51 am
@Real Mark 58, why would you avoid the tax advantaged etfs with the swaps?”

The potential for fraud is higher, and its not always perfectly clear who the counterparty is on the other side of the trade. The traditional ETF structure is beautiful in that, in institutional quantities, investors can exchange baskets of assets for ETF units, or ETF units for baskets of assets. Opaque structures suck in comparison and are far riskier.

Build Me a Trust Fund Spending Money Portfolio

JSS, I looked at XFN, XRE and XUT and I don’t think on an annual basis the dividend has ever declined. Quarterly, yes. Monthly, absolutely.

The problem with those ETFs Mr. Allen is that they’ve outperformed due to their correlation to falling long-term interest rates. So of course they’ve done well over their existence, which is much less than the past 30-40 years of falling rates.

If you have to do a Canadian ETF, I’d personally suggest just plain old XIU (or VCN), at over a 3% yield. At least you have greater diversification, and exposure to sectors and industries which historically benefit substantially from higher long-term rates. The REITs, the financials, and to a lesser extent, the utilities are going to face some real headwinds as the other half of the long-term rate cycle exposes itself.

Combined inflation totals 8 % since 2014? That is more close to the annual real inflation.

I think it is abundantly clear at this point that our current banking system where banks are not required to hold deposit reserves can’t withstand significant deflationary pressure, as does the budget.

You got things backwards.
You state that loonie will strengthen, TSX will rise which is an indicator of undervalued economy at the moment.

I am of the opposite opinion: That the economy is overvalued, both TSX and the loonie in real terms due to the huge pile of debt that we accumulated that drives up unjustifiable and unsustainable corporate and bank profits.
So I expect in real terms the economy to decline as it always has been the case after the crash of huge credit bubbles in history. Fake economy that goes down with the credit unwinding.

It is very interesting for me on how the ‘professionals’ in charge of BoC, financial regulators, the budget will handle the credit collapse, after all people have no money, just debt, nothing to spend as life gets more expensive.

My theory is that our rate hikes will be stopped at some point pretty soon, then reversed with government guaranteeing in some shape or form new loans by banks or by running massive deficits and public spending projects which will be bad for the loonie.

IMF and BIS warned us many times, continuation of consumption based economy with people at peak debt is not possible.

As we live in an open world, our exported oil is cheap but imports expensive, the most likely outcome would be outflow of capital (we are already seeing it), deficits, weaker currency and inflation. lots of it.
You have less disposable income and you spend it on more expensive products.

With the increasing prospects of crying and apologetic T2 being re-elected along with his merry band of incompetents, the likelihood of tax cuts is very low for an ideologically driven government and we will see some giant squeeze of the population first and crash of real estate prices followed by huge real and nominal GDP drop and panicking BoC cutting rates quickly accompanied by huge inflation as importers refuse to sell their products in depreciating loonie with the global markets actually improving in the next 2-5 years time frame.

We are trying to align our cycle of ‘tightening’ with the US but we did not use the low rates to deleverage as US did but to over-leverage.

Shaky road ahead.

The narrative that you describe of deflation/stronger currency, no house/or mild house prices correction while at peak household debt at the same time; with consumption and services based economy with no international competitiveness at all is wrong.

the term Globalist has been hijacked by the progressive to paint a pic of white nationalists.

I have never met a white nationalist, don’t even know any. I’m the son of a refugee and understand their plight. I also know why western countries are being flooded with them. Its not compation, it’s for a take over using there votes.

What the word globalist means to me is cabal of stupid do gooders that still think communism will work so long as there is no other nation that a man can run too when the confiscation begins.

That’s why the fight for a one world govt is so important to these fools

Communism is not compatible with human nature under any circumstances it will never be successful. History proves it over and over again.

You saw what a slight blip in the U.S stock market in October did to the TSX. Imagine what will happen when the real thing hits? If Trump gets impeached after the midterms the TSX will be cinders and ashes.

HA, great clips but that was then and this now; could provide many more links to what it is like now but I think that you are one step ahead of me and just testing all of us. Good job actually! If not, then????

@Graeme, post #56 who said:
Get out and go to cash. The stock market is going to retreat, across the board. 2018 was a shot across the bow…heed it.
————————————————————
Really? Have you checked the markets today, Nov. 6? The markets have rallied nicely. If I hadn’t sold off some DIRT CHEAP stocks I bought recently and made nice gains, I would have thought the “correction” was something I experienced in the best dream I’ve had in years and that it didn’t actually happen. Buy low, sell high like the governor that gives the engine more fuel/air mixture when the speed is low and less when the speed is high. It’s all so ridiculously simple, even a dumb hick like me who failed a basic financial course can understand it.

Garth’s Instagram Posts

The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.